SHAREHOLDERS
ARE DEMANDING that after years of unprecedented expansion telecom deliver the
profits promised in their business plans. This demand comes at a time when
customers are cutting back on their spending. In this environment, carriers are
exploring all methods to reduce costs and focus scarce resources on growing
revenue.

A new breed of centralized telecom
exchange offers an alternative. Such an exchange uses business approaches,
processes and systems modeled on those used in the financial markets and have
the ability to replace the current cost-laden wholesale billing process and
prevent disputes that add cost to an industry experiencing unprecedented margin
pressure.

Accelerated Cash Flow. In
today's capital-constrained telecom industry, cash flow and cash control are
critical. Call termination costs represent 80 percent to 85 percent of wholesale
telecom business costs. Collecting accounts receivable promptly means the
difference between profitability and bankruptcy. Trading on an exchange enables
carriers to improve cash flow as all bills are processed through the exchange
and all payments to or from the exchange are netted, reducing the amount of cash
transacted.

The exchange is not a carrier; its
core service involves making accurate payments to sellers on time, every time.
Moreover, exchanges make these payments as frequently as every 15 days, compared
to the industry average of 74 days. These accelerated payments eliminate the
economic risk of a working capital crunch caused by the misalignment of payables
and receivables.

Credit Risk Management.
Exchanges recruit strong financial partners to manage and underwrite credit
risk. This is crucial in today's turbulent industry that has witnessed high
profile bankruptcies impacting other carriers with a domino effect. The Credit
Risk Management table details some examples of the enormous amounts of money
that have been lost recently under the existing system.

A best-in-class exchange uses a
process that combines receivables insurance with cash collateral to secure
exposure resulting from the net of a member's buy and sell positions. Credit
monitoring systems warn and disable a member's ability to buy as it approaches
and then reaches its preset exposure threshold. Exchanges have insulated many
carriers selling to these companies against such losses.

Dispute Prevention. Three
main factors lead to billing disputes: rates, destination definitions and call
duration measurement.

Rate Discrepancies. Since 1996, the
growth in international carriers from 396 to more than 2,800 has been
accompanied by an increase in new services, calling rates and the opportunity
for expensive mistakes. Monitoring frequent rate adjustments due to shifts in
competitive market pricing adds an enormous and costly burden on in-house
billing departments. It is common for a Tier 1 carrier to receive and issue as
many as 10,000 rate changes a week.

In contrast, an exchange
automatically captures changing rates as the members themselves enter their buy
and sell orders. Calls cannot be passed without referencing the correct rate and
incorporating it into the call detail record (CDR). Buyers cannot be charged a
higher rate or sellers be paid less, because all transactions are governed by
data held in a neutral central repository.

Destination Discrepancies. Beyond
offering nationwide rates to various destinations, international carriers
compete by offering competitively priced termination to various detailed
destinations. The proliferation of hard-to-track codes associated with
destinations and expensive mobile and other premium services, are adding onto
the complexity and discrepancy of assigning codes to destinations. An exchange
can eliminate these issues by defining lists of all included codes for each
destination, and by alerting members when there are code changes.

Call Duration Discrepancies.
Carriers often disagree on the duration of calls. Buyers and sellers record
differing call lengths, triggering lengthy CDR reconciliation processes. A
neutral exchange, on the other hand, resolves this problem before it starts by
switching the traffic without incentive to alter the length of the calls. Its
impartial call timing records eliminate disagreements.

Frees and Focuses Resources. One
way carriers can exploit the above mentioned benefits is to shift their
low-volume, high-burden off-net traffic on to an exchange, eliminating 80
percent of their wholesale billing requirements and associated costs. Carriers
not only unload the billing to the exchange, but also the crucial collections
and credit-risk management functions. As a result, wholesale billing costs are
removed from a company's general and administrative (G&A) expense and key
staff are freed to focus on their core responsibilities.

David Sumka is vice president of
Business Systems for Arbinet-thexchange, a telecommunications industry veteran
with more than 15 years experience trading minutes and managing billing
operations in large companies such as AT&T Corp. and MCI and smaller telecom
startups.